ISM and the parade of wrong numbers

What the heck happened with the Institute for Supply Management manufacturing data released Monday?

Simply put, it’s due to the fine art of seasonal adjustment. Or the not-so-fine art.

But first, what is seasonal adjustment? It’s when volatile numbers are adjusted to allow for monthly comparisons to reflect seasonality. Jobless claims data is one way to show a world with and without seasonal adjustments.

Without:

With:

As you can see, seasonal adjustment makes a world of difference. So when the ISM used the wrong adjustment on a manufacturing survey, it produced a reading that was artificially low.

Seasonal adjustment, as any economist will tell you, isn’t an exact process. The government often is chided for how it applies it, making numbers look rosier or gloomier than they really are. But, unlike ISM on Monday morning, they usually apply the intended adjustment!

Anyway, economists who are familiar with ISM’s seasonal adjustment numbers, and the underyling data, say the reading should be 55.4% in May – the highest level so far this year – up from 54.9% in April.